UPDATE 1-Germany has duty to boost domestic demand, says Merkel

Tue Jun 11, 2013 9:05am EDT

* Merkel says Germany needs to help euro zone recovery

* Says wrong time to raise taxes, promises reforms

* Merkel ahead in polls before Sept. election

By Madeline Chambers

BERLIN, June 11 (Reuters) - Chancellor Angela Merkel vowed on Tuesday to pursue her two-pronged approach of budget consolidation and strengthening domestic demand if she is re-elected in September, adding that Germany had a duty to support the euro zone economy.

Courting votes in a major pre-election speech to the influential BDI industry association, Merkel attacked opposition plans to raise taxes and said her tax and investment policies had helped keep unemployment low and imports robust.

"We have taken all these measures because we have a responsibility to boost domestic demand given the very fragile situation in the euro zone," she said.

"In the long run, Germany can only prosper if Europe's economy, in particular the euro zone economy, gets back on its feet," she said. Much progress had been made in tackling the crisis "but we're not yet at the end of the road", she added.

Polls indicate Merkel's conservatives will be the biggest bloc after the election and she is likely to win a third term, though she may have to ditch her pro-business Free Democrats (FDP) coalition partners if they fare badly.

One option is a "grand coalition" with the opposition Social Democrats (SPD) with whom Merkel shared power from 2005 to 2009.

Several euro zone countries have urged Merkel, who has insisted that bailouts for debt-ridden euro states be tied to tough austerity measures, to strengthen demand in Europe's biggest economy which is traditionally reliant on exports.

In the last few months she has softened her tone as other European leaders, especially France's Francois Hollande, have put the accent on growth. Germany has introduced schemes to help countries like Portugal and Spain combat youth unemployment.

Merkel insists austerity and growth are two sides of the same coin.

"(In Germany) It was possible to consolidate the budget and boost domestic demand. So we are not only a stability engine but a growth engine in Europe," she said, adding imports had developed well to give Germany's a sound trade balance.

While her government aims to start paying back debt in the next legislative period, she has no intention of raising taxes, Merkel said. Both the SPD and their allies the Greens plan to increase taxes on the rich if they get into government.

"Any irritation in the current climate is absolutely wrong and therefore we will .. not raise taxes," she said.

Speaking after Merkel, her SPD challenger Peer Steinbrueck told the BDI he would not tinker with corporate taxes and any tax hikes would go to improving education and infrastructure.

Merkel said she wanted to continue the structural reforms which had transformed a country that just over a decade ago was known as "the sick man of Europe".

With an eye on demographic changes which threaten the pool of skilled workers, Merkel said she wanted better integration of immigrants and improved childcare to help women to work.

But her first task after the election would be a reform of the renewable energy law, she said. Many companies are angry about high energy costs driven up by the shift to green power.

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